Schumer: FERC's Official Closing of Loopholes in the Wake of This Summer's Energy Trading Scam a No-Brainer - Agency Must Now Pursue Public Investigation that Will Compensate Consumers, Prevent Future Trading Scams

Press Release

SCHUMER: FERC'S OFFICIAL CLOSING OF LOOPHOLES IN THE WAKE OF THIS SUMMER'S ENERGY TRADING SCAM A NO-BRAINER - AGENCY MUST NOW PURSUE PUBLIC INVESTIGATION THAT WILL COMPENSATE CONSUMERS, PREVENT FUTURE TRADING SCAMS

This Summer, Schumer Highlighted Greedy Energy Traders Who Ran Scam That Fleeced NY Consumers Of Untold Millions

Senator Pressed His 3-Point Plan To Turn The Lights Out On The Shady Practices - Seek Redress for Consumers, Close Potential Loopholes, Increase Market Monitoring, Press for More Aggressive Public Investigation

Schumer: FERC Took A Necessary Step, But Must Now H

Following the Federal Energy Regulatory Commission's (FERC) official closing of energy transmission loopholes that allowed rogue traders to reap tremendous profits, U.S. Senator Charles E. Schumer today said FERC needed to go a step further and conduct an aggressive, public investigation into the energy trading scam that could have bilked New York consumers out of untold millions.

"While this is a good step forward that slams shut an outrageous loophole, FERC must now get to the bottom of how this happened with a comprehensive and public investigation. Conducting the investigation behind closed doors just won't do. We need FERC to open up the books and determine both how much this cost New Yorkers and if that money can given back to consumers," Schumer said.

Schumer today renewed his push for a three-point plan to seek redress for New York consumers and municipalities after this summer's trading scam fleeced New York consumers of untold millions. Between the months of January and July of 2008, market traders used deceptive energy trading practices that slammed consumers with millions of dollars in unnecessary, additional fees. Since August, Schumer has urged FERC to conduct a more aggressive, public investigation of the energy trading scam and its full consumer impact; to permanently close potential market loopholes; and to increase market monitoring so that similar trading practices won't happen in the future. FERC is currently conducting a non-public investigation with no set deadline for completion. As a non-public investigation, third parties are prohibited from being party to the proceeding. Additionally, Federal Courts have held that FERC rulings and penalties in these are the last word and virtually impossible to appeal if the outcome is unsatisfactory to third parties.

According to a July 21st filing with FERC by the New York State Independent System Operator (NYISO), beginning in at least January of this year, one or more market participants began to schedule circuitous and inefficient routes for transmission between states. Direct transactions between two points - principally from New York to the PJM Service Territory in either Pennsylvania or New Jersey - were scheduled to be "sent" on a roundabout course that purportedly would travel around Lake Erie, transporting power through Ontario, Michigan and Ohio and then back to the intended destination in Pennsylvania or New Jersey.

This practice of scheduling power on circuitous routes around Lake Erie was unnecessary and costly to New York utilities, power producers, and consumers. The economic motive for this practice appears was evading fees associated with sending power over congested, direct lines between New York and New Jersey for which there is a more costly transaction fee. But even though the power was scheduled to be sent on that roundabout route, the physical properties of electricity dictate that it travels principally on the path of least resistance -- often the shortest path -- meaning it still traversed the congested lines in New York the traders were trying to evade.

"The bottom line is that rogue energy traders were exploiting a loophole and reaping big profits even while they were ripping off New York consumers and municipalities. FERC must discover who did it, how much it cost and find a way for restitution to be made," said Senator Schumer.

The New York Independent System Operator (NYISO) has estimated that the practice cost $96 million, while others estimate that the increased congestion and "uplift" fees have cost consumers as much as $125 million in April and May of this year alone, and as much as $240-290 million overall. It appears that this practice may have played at least a part in New Yorkers spiking utility bills, as well as the record bills faced by many municipal electric utilities.

The unannounced power flowing over portions of the transmission grid had several serious economic impacts on New York ratepayers, including:

* Uplift Charges: The scheduling over circuitous paths increase unexpected congestion on transmission lines the cost of which is not attributable to a particular market participant. Then, in the Day-Ahead Market, the NYISO was forced to increase congestion charges to all users of the interface. That creates "uplift" in prices for all customers, the burden of which is passed onto to residential on commercial users.

* Congestion Rent Shortfalls: The NYISO issues Transmission Congestion Contracts (TCC) with owners of transmission that rely on fully utilizing their capacity. These contracts can provide a benefit to consumers because, when capacity is maximized, the transmission owners pay a credit back to their customers under an arrangement with NYISO. However, if they cannot collect rents from all those who are using the lines - because some are piggybacking for free - a diminished credit is given. DC Energy, a party to this case with FERC estimates that congestion rent shortfalls has cost consumers on the order of $40 million since the beginning of 2008.

* Costly Generation:With congestion clogging up transmission lines, utilities cannot rely on buying cheap power and must ramp up costly generation. In these instances, the NYISO would have to pay a premium to generators to hastily supply power when it cannot be brought in through transmission. This expensive fix would, again, be passed on directly to the consumer.

To illustrate the cost of this practice on a single day, the NYISO calculated that on May 26, 2008 over 2000 megawatts (MW) were scheduled on the circuitous Lake Erie route: travelling to western New York before entering Ontario, then the Midwest Independent System Operator via Michigan and Ohio and then back to PJM in New Jersey or Pennsylvania. According to their analysis, on this day alone, $800,000 in uplift and congestion fees was attributable to this trading practice.

In Upstate New York, small cities like Plattsburgh, Rouses Point and Tupper Lake, for example, have been hit with exorbitant uplift fees from NYISO, hundreds of thousands of dollars in excess of what they usually pay. The full impact on consumers is still unknown but could have affected consumers and municipalities across New York State.

Today, in an effort to seek full redress for New York consumers, Senator Schumer continued his push for a three-point proposal to ensure that FERC's investigation is thorough and institutes the right safeguards to prevent the trading practices from happening again. Schumer called for FERC to:

* Launch a vigorous public investigation, including full consumer impact: Currently FERC is conducting a closed investigation that has no set conclusion date and precludes third parties from being involved. The investigation must also address key questions like: how much exactly did these schemes cost consumers and whether any laws or tariffs were broken. Schumer urged FERC to investigate how best to seek redress for the consumers.

* Institute more stringent market oversight: In their initial petition, the NYISO asked for the ability to share scheduling and trading information with other Regional Transmission Operators (PJM, Ontario, etc). Schumer pushed FERC to approve this request in order to bring more stringent market oversight. Schumer also urged transparency in how uplift charges are calculated, which would also help in determining when someone is taking advantage of the system. FERC has yet to grant approval to this request.

* Close off Further Loopholes: The NYISO identified - and FERC closed off - 8 different trading paths that were being used by traders. There is a concern from some utilities that the NYISO might not be aware of other trading practices that are passing on costs to consumers. FERC could require the NYISO to put an administrative process into place so that any inappropriate changes to loop flows can be immediately detected and mitigated.

Schumer was one of the first to call for a full public investigation into the scam. In August, Schumer wrote a personal letter to FERC Chairman Joseph Kelliher demanding an immediate investigation into the practices and urging that FERC take immediate action to permanently close the loophole. He later met personally with Chairman Kelliher in September to further push for this investigation.

Schumer wrote at the time, "It is absolutely critical that FERC determine exactly who have been engaging in these practices; for how long has they have been occurring; and how much it has cost New York consumers and municipalities."

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